China stocks: Can the ugly duckling turn into a swan?

China is no longer the ugly duckling: Fidelity

China's stock market has long failed to live up to expectations of stellar gains, but that hasn't stopped some analysts from holding out hope for the Shanghai Composite.

"People still view China as the ugly duckling, but we think it's going to be the swan," Catherine Yeung, an investment director at Fidelity Worldwide Investment, told CNBC on Thursday.

"We continue to be overweight China stocks when you look at Hong Kong and China combined," she added.

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The Chinese equity market is down over 4 percent year to date. In the past year the market is down 11 percent, while broader Asian markets outside Japan have gained almost 7 percent and the has rallied just over 17 percent.

Concerns about slowing economic growth in China, the world's second biggest economy, combined with worries about the shadow banking and property sectors have undermined the stock market.

Perhaps 2014 may turn out to be another lackluster year for Chinese equities, but the outlook should be brighter as long as Beijing does not resort to a heavy dose of stimulus to meet its growth targets, analysts said.

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"The outlook is as positive as it has been for several years and contributing to that is the progress in place and more stable monetary conditions," said Tim Condon, head of research for Asia at ING Financial.

"This is a year of consolidation but 2015 may be the year that we see the Shanghai Composite begin to claw back towards 6,000 after several years of dismal performance," he said.

The Shanghai Composite stood at around 2,037 in early Friday trade.

China's economy grew at annual pace of 7.4 percent in the first quarter, slowing from 7.7 percent in the final quarter of last year. Recent economic data suggest the economy is stabilizing, helped by a series of "mini stimulus" measures from Beijing.

Daniela Duncan | Moment| Getty Images

Data at the weekend for instance showed the official purchasing managers index (PMI), a gauge of factory activity, climbed to 50.8 in May from 50.4 in April. Any number about 50 is consistent with expansion in manufacturing activity.

"Growth is unlikely to hit 7.5 percent this year," said Yeung at Fidelity, referring to Beijing's official growth target for 2014. "But for them [the authorities] to implement a huge stimulus plan would be a big red flag to fund managers."

"As long as the government doesn't lose its nerve, the market should be ok," she added.

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The concern, say analysts, is that stimulus – whether monetary or fiscal – could lead to overheating in some sectors of the economy such as property and erode confidence in Beijing's ability to steer growth towards a stable path.

"What has been a contributing factor to weakness in the Shanghai Composite, which has been in a bear market since mid-2010, is unstable monetary policy," said Condon at ING.

"Putting monetary policy back into pre-financial crisis stable settings would work wonders in China and there are positive developments in the first quarter in 2014 to suggest we are heading back to the conditions that will set the stage for recovery in Shanghai Comp," he said.

And off course not all China stocks have had a bad time. E-commerce giant Alibaba is expected to get a strong positive response when it lists its shares in New York later this year. And shares in Chinese e-commerce company spiked in their U.S. market debut last month.

"For now, investors seem very interested in putting money into e-commerce China stocks," said Erwin Sanft, head of China and Hong Kong equity research at Standard Chartered.